Dynasty Trust:

South Dakota was the first unlimited duration trust state (1983) with no state income tax. Many advisors and clients struggle with the idea of creating a generation-skipping trust with an unlimited duration (i.e., a dynasty trust) as a result aware of the advantages of creating such a trust and how flexible this trust can actually be. Once the flexibility and advantages are understood, many clients frequently ask the question, "Why wouldn't I want an unlimited duration Dynasty Trust?", however, it is not enough to ask someone whether they want an unlimited duration Dynasty Trust without explaining the advantages, because the typical reaction is that 80 to 120 years is sufficient.

A Trust's Maximum Duration Varies by State:

Most stateslimit a trust's duration (e.g., the maximum in New York and many other states is “lives in being” plus 21 years).

Trusts can be perpetual in 21 states and Washington D.C.; South Dakota can be distinguished from all of these states, as pointed out in the January 2012
Trusts & Estates magazine article by Mark Merric and Dan Worthington entitled "Which Situs is Best in 2012?".

The RAP rules are typically based on where the trust is administered.

Client does not have to live where the trust is administered.

The only reported case involving IRC § 2041(a)(3) is Estate of Murphy v. Commissioner, in which the Tax Court held that the exercise of a limited power of appointment to create another limited power of appointment
did not spring the Delaware tax trap because, under applicable Wisconsin law, the exercise of a limited power of appointment did not commence a new perpetuities period due to the fact that Wisconsin abrogated their common law rule against perpetuity and had a statute expressed in terms of a rule against the suspension of power of alienation. In this case the
IRS acquiesced. The
Murphy case was relied upon by South Dakota in the creation of its RAP laws prior to 1986 and the imposition of the modern Generation Skipping Transfer tax.

Why an Unlimited Trust Duration? Preserving Family Values:

1. Promotion of Fiscal Responsiblity:

Incentive clauses (for instance, $2 of trust income for each $1 of W-2 income) – with exceptions, for example,
disability

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